Deck 8: Cash and Internal Controls

Question 1

Separation of duties involves dividing responsibility for a transaction or a series of related transactions between two or more individuals or departments.

Answer 1

True

Question 2

The use of internal controls provides a guarantee against losses due to operating activities.

Answer 2

False

Question 3

Clearly establishing responsibilities and assigning all accounting activities to one person is an important principle of internal control.

Answer 3

False

Question 4

Internal control in technologically advanced accounting systems depends less on the design and operation of the information system and more on the analysis of its resulting documents.

Question 5

According to good internal control policies, a person who controls an asset also maintains that asset's accounting records.

Question 6

The Sarbanes-Oxley Act (SOX) requires managers and auditors of companies whose stock is traded on an exchange to document and certify the system of internal controls.

Question 7

Cash equivalents are short-term highly liquid investment assets that are readily converted to a known cash amount, and have maturities of one year.

Question 8

Maintaining adequate records is an important internal control principle.

Question 9

Internal control systems are subject to limitations that usually arise from either (1) human error or human fraud, or (2) the cost-benefit principle.

Question 10

Money orders, cashier's checks, and certified checks are all examples of cash.

Question 11

Insuring assets and requiring all accounting personnel to have CPA licenses are two important principles of internal control.

Question 12

An internal control system consists of the policies and procedures companies use to protect assets, ensure reliable accounting, promote efficient operations, and uphold company policies.

Question 13

Harsh penalties exist for violators of the Sarbanes-Oxley Act (SOX) - sentences up to 25 years in prison with severe fines.

Question 14

Cash registers, time clocks, and personal identification scanners are examples of technologies that can improve internal control.

Question 15

Technologically advanced accounting systems rarely need monitoring for errors because computers always process transactions correctly.

Question 16

Because employees know that bonding is an insurance policy against loss from theft, bonding does not generally discourage loss from theft.

Question 17

Collusion is a form of fraud where individuals collaborate to thwart separation of duties.

Question 18

Human fraud is driven by the triple-threat of fraud: Opportunity, collusion, and rationalization.

Question 19

A properly designed internal control system is a key part of systems design, analysis, and performance.

Question 20

Liquidity refers to a company's ability to pay its long-term obligations.

Question 21

Assigning purchasing, receiving, and paying for merchandise to one department or individual is a way to streamline a voucher system.

Question 22

When evaluating the days' sales uncollected ratio, generally the higher the receivables balance, the better the ratio.

Question 23

A voucher system's control over cash disbursements begins when a company incurs an obligation that will result in eventual payment of cash.

Question 24

A check involves 3 parties: a maker who signs the check, a payee who is the recipient, and a bank on which the check is drawn.

Question 25

Internal control of cash receipts aims to ensure that all cash received is properly recorded and deposited.

Question 26

The days' sales uncollected ratio measures the liquidity of accounts receivable.

Question 27

If the Cash Over and Short account has a credit balance at the end of the period, the amount is commonly reported as miscellaneous revenue.

Question 28

The days' sales uncollected ratio measures a company's ability to manage its debt.

Question 29

A voucher system establishes procedures for verifying, approving, and recording obligations for eventual cash disbursement.

Question 30

A voucher system is a set of procedures and approvals designed to control cash disbursements and the acceptance of obligations.

Question 31

The clerk who has access to the cash in the cash register should also have access to the cash register tape or file.

Question 32

Basic bank services such as bank accounts, bank deposits, and checking contribute to the control of cash.

Question 33

Most large thefts occur from payment of fictitious invoices, which makes control of cash disbursements especially important for companies.

Question 34

Electronic funds transfers (EFTs) are decreasingly used by companies due to the inconvenience and high cost.

Question 35

Vouchers should be used for purchases of inventory and all other expenditures made within a company.

Question 36

On a bank statement, deposits are listed as credits because the bank increases its liability to the depositor when the deposit is made.

Question 37

Signature cards, deposit tickets, checks, and bank statements are all examples of internal control devices for banking activities.

Question 38

A voucher is an external document used to accumulate information to control cash disbursements and to ensure that a transaction is properly recorded.

Question 39

The payee is the person who signs a check, authorizing its payment.

Question 40

Canceled checks are checks the bank has paid and deducted from the customer's account during the period.

Question 41

The petty cash fund should be reimbursed when it is nearing zero and at the end of the accounting period when financial statements are prepared.

Question 42

An invoice is an itemized statement of goods prepared by the customer listing the customer's name, items sold, sales prices, and terms of sale.

Question 43

Outstanding checks, deposits in transit, deductions for bank fees, additions for interest, and errors are all factors that can cause the bank statement balance for a checking account to be different from the company's checking account balance.

Question 44

Since petty cash is concerned with such small amounts of cash, it is not necessary to document all transactions with a petty cash receipt.

Question 45

When a voucher system is used, an invoice approval is not needed as long as the purchase is evidenced by an invoice and purchase order.

Question 46

The entry to increase the balance in petty cash from $50 to $75 would include a credit to Petty Cash of $25.

Question 47

Proper internal control would require that a department manager inform the purchasing department of its needs for additional merchandise by preparing and signing a purchase requisition which lists the merchandise needed and requests that it be purchased.

Question 48

It is generally not necessary for businesses to reconcile their checking accounts since banks keep accurate records and provide internal control support for cash.

Question 49

After preparing a bank reconciliation, adjustments must be made for items reconciling the book balance.

Question 50

Outstanding checks are checks the bank has paid and deducted from the customer's account during the month.

Question 51

Approved vouchers are recorded in a journal called the voucher register.

Question 52

A receiving report is a document used within a company to notify the appropriate persons that ordered goods have been received and to describe the quantities and condition of the goods.

Question 53

Outstanding checks, deposits in transit, and bank service charges are added to the beginning balance of the bank statement to determine the adjusted bank balance.

Question 54

The Petty Cash account is a separate bank account used for small amounts.

Question 55

Deposits in transit are deposits made and recorded by the depositor but not yet recorded on the bank statement.

Question 56

A purchase order is a document the purchasing department sends to the vendor to place an order.

Question 57

In order to streamline the purchasing process, department managers should place orders directly with suppliers.

Question 58

A bank reconciliation explains any differences between the balance of a checking account on the depositor's records and the balance reported on the bank statement.

Question 59

A debit balance in the Cash Over and Short account reflects an expense and is reported on the income statement as part of selling, general and administrative expenses.

Question 60

Petty cash reimbursement requires a journal entry that involves a debit to the appropriate expenses and a credit to Cash.

Question 61

A company's internal control system:

A) Eliminates the need for audits.
B) Eliminates the need for managers' certification of controls.
C) Monitors company and employee performance.
D) Eliminates the company's risk of loss.
E) Eliminates human error.

Question 62

The principles of internal control include:

A) Maintain minimal records.
B) Bond all employees.
C) Separate recordkeeping from custody of assets.
D) Use only computerized systems.
E) Require automated sales systems.

Question 63

Cash equivalents meet all of the following criteria except:

A) Have a market value that is not sensitive to interest rate changes.
B) More liquid than cash.
C) Short-term investments purchased within 3 months of their maturity dates.
D) Readily convertible to a known cash amount.
E) Short-term U.S. treasury bills.

Question 64

The impact of technology on internal controls includes:

A) Elimination of the need for regular audits.
B) Reduced processing errors.
C) Elimination of separation of duties.
D) Elimination of fraud.
E) Elimination of the need to bond employees.

Question 65

The following information is available for Birch Company at December 31: $$\begin{array} { | l | r } \hline \text { Money market fund balance } & \$ 2,790 \\\hline \text { Certificate of deposit maturing June 30 of next year } & \$ 10,000 \\\hline \text { Postdated checks from eustomers } & \$ 1,475 \\\hline \text { Cash in bank account } & \$ 21,430 \\\hline \text { NSF checks from eustomers returned by bank } & \$ 650 \\\hline \text { Cash in petty cash fund } & \$ 200 \\\hline \text { Inventory of postage stamps } & \$ 24 \\\hline \begin{array} { l } \text { U.S. Treasury bill purchased on December 15 and maturing on February } \\\text { 28 of following year }\end{array} & \$ 5,000 \\\hline\end{array}$$ Based on this information, Birch Company should report Cash and Cash Equivalents on December 31 of:

A) $38,770
B) $29,420
C) $41,345
D) $31,345
E) $39,420

Question 66

A properly designed internal control system:

A) Requires the use of non-computerized systems.
B) Lowers the company's risk of loss.
C) Eliminates the need for an audit.
D) Insures profitable operations.
E) Is not necessary if the company uses a computerized system.

Question 67

Which internal control principle prescribes the use of pre-numbered printed checks?

A) Technological controls.
B) Divide responsibility for related transactions.
C) Establish responsibilities.
D) Perform regular and independent reviews.
E) Maintain adequate records.

Question 68

Basic bank services do not include:

A) Petty cash management.
B) Bank accounts.
C) Bank deposits.
D) Electronic funds transfer.
E) Checking.

Question 69

The three parties involved with a check are:

A) The maker, the manager, and the payee.
B) The writer, the cashier, and the bank.
C) The bookkeeper, the payee, and the bank.
D) The signer, the cashier, and the company.
E) The maker, the payee, and the bank.

Question 70

Managers place a high priority on internal control systems because the systems assist managers in all of the following except:

A) Upholding company policies.
B) Assuring that no loss will occur.
C) Promoting efficient operations.
D) Ensuring reliable accounting.
E) Protecting assets.

Question 71

The following information is available for Montrose Company at December 31: A nine-month certificate of deposit maturing on June 30 of
$$\begin{array} { | l | r | } \hline \text { Cash in bank account } & \$ 8,540 \\\hline \text { Petty cash } & 250 \\\hline \text { Money market fund balance } & \$ 10,400 \\\hline \text { Checks from customers } & \$ 1,350 \\\hline \text { NSF checks from customers returned by bank } & \$ 805 \\\hline \text { Treasury bill maturing in 60 days } & \$ 10,000 \\\hline \text { Money orders } & \$ 290 \\\hline \text { A nine-month certificate of deposit maturing on June 30 of next year } & \$ 6,000 \\\hline\end{array}$$
Based on this information, the amounts considered Cash and Cash Equivalents, respectively on December 31 are:

A) Cash $19,190; Cash equivalents $16,000
B) Cash $8,540; Cash equivalents $22,290
C) Cash $8,790; Cash equivalents $26,400
D) Cash $10,430; Cash equivalents $20,400
E) Cash $11,235; Cash equivalents $26,400

Question 72

The following information is available for Fenton Manufacturing Company at June 30: $$\begin{array} { | l | r | } \hline \text { Cash in bank account } & \$ 11,455 \\\hline \text { Inventory of postage stamps } & \$ 74 \\\hline \text { Money market fund balance } & \$ 10,400 \\\hline \text { Petty cash balanes } & \$ 350 \\\hline \text { NSF checks from customers returned by bank } & \$ 867 \\\hline \text { Postdated checks received from customers } & \$ 791 \\\hline \text { Money orders } & \$ 290 \\\hline \text { A nine-month certificate of deposit maturing on December 31 of } & \$ 6,000 \\ \text { current year } & \\\hline\end{array}$$ Based on this information, Fenton Manufacturing Company should report Cash and Cash Equivalents on June 30 of:

A) $12,095
B) $22,495
C) $28,495
D) $23,286
E) $29,286

Question 73

Principles of internal control include all of the following except:

A) Apply technological controls.
B) Maintaining security by having one person track and record assets.
C) Divide responsibilities for related transactions.
D) Separate recordkeeping from custody of assets.
E) Perform regular and independent reviews.

Question 74

Internal control policies and procedures have limitations not including:

A) Establishing responsibilities.
B) Human error.
C) Collusion.
D) Cost-benefit principle.
E) Human fraud.

Question 75

Cash equivalents:

A) Are readily converted to a known cash amount.
B) Include checking accounts.
C) Have no immediate value.
D) Include savings accounts.
E) Include time deposits.

Question 76

Which of the following is not one of the policies and procedures that make up an internal control system?

A) Guarantee a return to investors.
B) Promote efficient operations.
C) Urge adherence to company policies.
D) Protect assets.
E) Ensure reliable accounting.

Question 77

Internal control systems are:

A) Developed by the Securities and Exchange Commission for public companies.
B) Developed by the Small Business Administration for non-public companies.
C) Required only if a company plans to engage in interstate commerce.
D) Developed by the Internal Revenue Service for all U.S. companies.
E) Required by Sarbanes-Oxley (SOX) to be documented and certified if the company's stock is traded on an exchange (a public company).

Question 78

Cash, not including cash equivalents, includes:

A) Customer checks, cashier checks, and money orders.
B) Two-year certificates of deposit.
C) Postage stamps.
D) IOUs.
E) Money market funds.

Question 79

Cash equivalents:

A) Are recorded in petty cash.
B) Include checking accounts.
C) Include money orders.
D) Are short-term, highly liquid investment assets.
E) Include 6-month certificates of deposit.

Question 80

Two clerks sharing the same cash register is a violation of which internal control principle?

A) Maintain adequate records.
B) Establish responsibilities.
C) Apply technological controls.
D) Bond key employees.
E) Insure assets.